High Growth Segment (HGS) is a new market launched by the London Stock Exchange (LSE). It provides a new method of listing and access to capital for fast-growing companies and investors who back them, writes Paul Lines (pictured below). The HGS should be particularly relevant for companies in the technology sector that are dynamic, entrepreneurial and often experiencing rapid growth.
This is important because, for the UK to encourage growth companies – particularly in the technology sector – we need to make stock markets as appealing as possible. Otherwise there is a risk they will look to overseas markets and investors to support their growth.
Incentive for fast growing business
At the moment, businesses looking to float on the main market of the LSE need to make at least 25% of their shares available to investors, which can prove a deterrent. Like Nasdaq, HGS will allow companies to list just 10% of their shares, which should provide incentives for fast-growing businesses hungry for wider investment. The reduced free-float requirements will allow investors to access high quality companies while the existing owners can maintain effective control.
The HGS will act as a stepping stone for companies to get used to life as a public company – complying with the continuing obligations regime – with a view to joining the main market over time. Companies will also enjoy the other benefits of being listed on London’s markets, in particular access to capital for further fundraising, increased profile with customers and suppliers and the ability to use their listed shares as acquisition currency.
Stepping stone for IPO
The new segment will be tailored to medium-sized companies with a requirement to raise a minimum amount of £30m on float. Other entry criteria – for example a compound annual growth rate of 20% over a three year period – are designed to appeal to fast-growing businesses. HGS could provide a route to market for more mature, but still fast-growing, private equity-backed businesses considering an initial public offering (IPO).
The HGS will be open to companies across the European economic area, potentially a defensive move to combat a trend which has seen a number of European technology businesses lured to the US markets over recent years.
Playing the long game
Despite the potential of HGS, we should not expect it to immediately create UK technology giants. Nasdaq has built its reputation over 40 years and is home to once-in-a-generation businesses like Microsoft, Google and Facebook.
HGS is a step in the right direction but it will be some time before we can measure its full impact. As global competition becomes more intense, HGS should help make the UK the natural hub for non-US technology businesses in the next decade and provide a launch pad for companies and entrepreneurs to exploit the UK’s leading position in the digital economy.
Paul Lines is director at international investment bank Altium
This was first published in March 2013